Analysis of Factors Affecting Inflation and its Impact on

European Research Studies Journal Volume XX, Issue 4B, 2017

pp. 38 - 56

Analysis of Factors Affecting Inflation and its Impact on

Human Development Index and Poverty in Indonesia

Y. Yolanda1

Abstract:

This study has the objective to analyze the effect that occurs between Indonesian Bank (BI)-

rate, Foreign Exchange Rates, Money Supply, oil price and gold prices on Inflation, its

impact on human development Index (HDI) and poverty in Indonesia for the period 1997 up

to 2016.

This study used secondary data with purposive sampling method. Methods of data analysis

using multiple regression analysis, Model 1: Results of this study indicate that there are

significant variables simultaneously at BI Rate, Foreign Exchange Rates, Money Supply, oil

price and gold prices to the level of inflation in Indonesia.

The results also showed variable BI rate, money supply, oil price and gold prices partial

effect on the level of inflation positively and significantly, while the exchange rate variable

does not affect the rate of inflation.

The results determinant coefficient of 0.9497means the ability of independent variables to

explain the dependent variable of 94.97 % , while the remaining 5,03 % is influenced by

other variables and are not included in this study. Model 2: inflation on HDI is significant

and positif and model 3: Inflation on poverty is significant and positive.

Keywords : Exchange rate , JUB , BI rate, oil price, gold price, Inflation, HDI and Poverty.

1Lecturer of Faculty of Economnic, Borobudur University Jakarta, Indonesia

Email : [email protected]

mailto:[email protected]

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39

1. Introduction

Inflation is one of the most important macroeconomic variables and the most feared

by the economic actors, including the Government, because it can bring bad

influence on the structure of production costs and the level of welfare. And the wider

effects such as instability, economic growth, the declining of competitiveness, the

interest rate, uneven income distribution and unemployment is increasing. Some of

the countries that have experienced hyperinflation showed that poor inflation would

lead to social and political instability, and did not create the economic growth

(Sukirno, 2004).

The year 1998 was the toughest year for the economy of Indonesia, where the rate of

inflation was 77.63 per cent, the falling value of the rupiah against foreign currencies

and socio-political factors that are not safe, resulting in the prices of goods and

services continue to rise sharply until the end of 1998. Entering the year 1999

inflation rate can be on tap to 2.01 percent, this is the lowest inflation rate over a

span of 20 years (1987-2006). The decline in inflation was caused by the

strengthening of the rupiah in the foreign exchange market and also the prices of

goods and services on the market which can be controlled by the government.

Ahead of the annual session of People's Consultative Assembly (August 2000), the

inflation rate has risen to 9.35 percent with CPI of 563.28 percent, the increase in

inflation is related to a series of government policies such as the reduction of fuel

subsidies, excise tax and an increase in request of goods and services by the

community to celebrate the same religious day.

In late 2002 there was a bomb blasting in Bali (Bali tragedy). This condition does

not improve the rate of inflation, but only affects the inflation rate quarterly or

monthly. In 2003, inflation declined from the previous year of 5.1 per cent that are

affected by the improvement in the real sector and the confidence of investors to

Indonesia. At the end of 2004 (December 26, 2004), there were an earthquake and

tsunami that hit Aceh and parts of Sumatra, so that the rate of inflation in 2005

became 17.1 per cent, then in 2006 the rate of inflation achieved 6.60 percent.

Inflation can be caused by excess/pull request (liquidity/money/currency) occurs due

to excessive total demand which is usually triggered by a flood of liquidity in the

market resulting in a high demand and trigger changes in the price level. Increasing

the volume of the medium of exchange or liquidity associated with the demand for

goods and services resulting in increased demand for factors of production. The

increasing demand for production factors causing prices to rise. While inflation

insistence costs (cost push inflation) occurs due to the scarcity of production and/or

also include the scarcity of distribution. The lack of launch of distribution flow or

the reductionof production provided from the average normal demand could trigger a

price increase in accordance with the legal validity of the demand-supply.

Analysis of Factors Affecting Inflation and its Impact on Human Development Index and

Poverty in Indonesia 40

The phenomenon of inflation in Indonesia is not a short term phenomenon and

occurs situationally, but as was common in other developing countries, inflation

problem in Indonesia is more on the issue of long-term inflation due to it still has a

structural barriers in the country's economy, Besides, inflation is more influenced by

the surge in oil prices in the international market and the scarcity of raw materials as

coal and gas, all of which will cause rise in energy costs. This may encourage

further energy source procurement costs of electricity and fuel for most mills.

Likewise, the same thing can happen on the distribution, which in this case the

infrastructure factor plays a very important role.

According to some research about the factors that affect Inflation: (1) Asghapur,

Kohnehshahri and Karami (2014), the interest rate has a negative correlation to

inflation. This is also supported by Kandel, Ofer, and Sarig (1996) which states that

interest rates are negatively correlated with inflation. (2) Ghazali (2003) found no

significant relationship between interest rates and inflation. (3) Heni Noviarita

(2003) in the study Analysis of Inflation in Indonesia (Dynamic Model Approach)

1980: 03-2002: 04 period shows that for the long term, a variable amount of money

supply, exchange rates, gross domestic product, inflation expectations have a

significant effect on inflation. (4) Bjornland (1997) asserts that the rise in oil prices

has a long-term effect on core inflation and output. (5) Saleem, S. and Ahmad, K.

(2015) explain that for long and short term, the Money, Crude Oil Prices, Exchange

Rate, Interest rates and taxes do not have a positive relationship while real GDP had

a negative correlation to inflation during the study period in Pakistan 1979 to 2012.

(6) Zarshad Ahmed and Yasir Rahim stated that dollar, gold and Petrol Prices

significantly took effect on inflation in Pakistan (June 2008 to June 2013). (7)

Pourroy (2012) investigated the role of exchange rate in inflation targeting in

developing countries and find strong evidence that exchange rate strategy plays a

major role during inflation shock in 2007-2008. Management of nominal exchange

rate gives stronger anchor (better resistance to inflation shock in 2007-2008). (8)

Chhibber et al. (1998), found that monetary growth, foreign prices, exchange and

interest rates, unit labour cost, and real output are the key determinants of inflation

in that country.

Inflation as an economic phenomenon will certainly have an impact on economic

activities, which often have a negative impact on public finances, the purchasing

power of money will be lower, and to get something, more money is needed and can

ultimately affect builders of quality of life (community/population). Indicators used

to measure the quality of human life is a human development index (HDI) was

introduced by the United Nations Development Program (UNDP) in 1990 and

published periodically in the annual report of the Human Development Report

(HDR). According to the UNDP; HDI is a composite index that includes three areas

of human development which is considered to be very basic, which is used as an

indicator of (i) the areas of health: age life (longetivity); (ii) education: knowledge;

and (iii) the economic field: decent living standards (decent living).

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Human development in Indonesia during the period 1996-2007 has increased, except

for the period 1996-1999. It is not apart with the deteriorating situation of the

Indonesian economy as a result of the economic crisis. Since the economic crisis in

mid 1997, Indonesia's HDI has moved down to 64.3 (1999) and led to Indonesia's

position slipped to 110 th out of 177 countries, where before Indonesia was ranked

99 of 177 countries (UNDP, 2004). In 2004, up to the order of 108 (out of 177

countries), this sequence is better than other ASEAN countries such as Vietnam

(109), Myanmar (130), Laos (133) and East Timor (142), and under the Singapore

(25), Brunei Darussalam (34), Malaysia (61), Thailand (74) and the Philippines (84).

Inflation influence on the HDI is based on the results of research from several

reseachers; (1) Rita Otopea Osiakwan, Stephen E. Armah (2013), inflation has the

negative and significant effects on the standard of living (meansure of HDI) in

Ghana, Standard of living is only partially sensitive to inflation however the adverse

impact of inflation on standard of living Increasingly worsens as inflation increases.

Therefore in Ghana, people are Increasingly worse off as inflation increases. (2)

Zezza et al. in the Arab Naz et al. (2011) inflation can disrupt business planning,

nutrition, health and children's education. (3) Zeman et al. (2011) uses poverty

growth model for countries of SAARC (Bangladesh, Nepal, Pakistan, India and Sri

Lanka) in 1988-1909. Results showed that 1 percent increase in inequality income

reduced poverty by 0.67 percent and 1 percent increase in economic growth to

reduce poverty by 0.1 percent while trade openness and significant poverty reduction

of health expenditures in SAARC countries.

Poverty is a state where the inability to meet basic needs such as food, clothing,

shelter, education, and health.The non-capability in meeting those needs which are

caused by rising prices of basic necessities that are continuous (inflation). CPM

noted the number of poor people of March 2010 was 31.02 million (13.33%), in

September 2014 was 27.73 million (10.96%) and in March 2015, the poverty rate

increased by about ten percent to 28.95 million (11.22 percent). While the poverty

severity index in March 2012 (0.473), March 2013 (0.432), in March 2014 there

were at the level of 0.435, and in March 2015 which increased from the previous

year was 0.535.

The results of the researchers stating that inflation can affect poverty including: (1)

Shahidur Rashid Talukdar (2012), the effect of inflation on poverty in low income

countries, lower middle-income countries, and upper middle-income countries to see

whether the effect of inflation is similar or different in countries with different levels

of income. They found that although in most of the cases inflation shows a positive

and statistically significant correlation with poverty, however, in the case of low

income countries, the relationship between inflation and poverty is negative and

statistically insignificant under certain specifications. (2) Joko Susanto (2014), the

results show that the economic growth has negative impact on poverty rate in java,

while the inflation has positive impact on poverty rate in Java. A higher economic

growth corresponds to a lower poverty rate, while a higher inflation corresponds to a



higher poverty rate. Furthermore, minimum wage has no impact on poverty rate in

Java. (3) In Hazoor Muhammad Sabir and Safdar Hussain Tahir (2012) study results

revealed that GDP growth rate per capita income, major crops, minor crops and

livestock had negative impact while inflation and population growth rate had

positive impact upon poverty in Pakistan (1981-2010). (4) Powers (1995), found

there was a significant and positive relationship between inflation and the level of

poverty when poverty is measured in terms of consumption (consumption poverty

rate). (5) Eliana Cardoso (1992) in his article entitled "Inflation and Poverty", with

the area of research in seven Latin American countries (Argentina, Colombia, Costa

Rica, Chile, Mexico, Peru and Uruguay) with the data from the years 1977 to 1989,

using linear regression method, reached the conclusion that inflation causes poverty

generally through real wages (real wages), empirical evidence showed that rising

wages more slowly than the price for inflation increased in Latin America. (6)

Sudarlan (2015) said that inflation has a positive and significant impact on the

poverty headcount and no effect on the poverty gap and poverty severity. (7)

Theresa Thompson Chaudhry and Azam Amjad Chaudhry, simulated food and

energy price shocks present some important results: First, the impact of food price

increases on Pakistani poverty levels is substantially greater than the impact of

energy price increases. Second, the impact of food price inflation on Pakistani

poverty levels is significantly higher for rural populations as compared to urban

populations. Finally, food price inflation can lead to significant increases in

Pakistani poverty levels. For Pakistan, 20% increase in food prices would lead to 8%

increase in the poverty head count.

Based on the above, then conducted a research on the factors that affect the rate of

inflation in Indonesia in 1997 to 2016 that the BI rate, Money Supply, the rupiah

against the US dollar, oil prices and the price of gold and how the effects of inflation

on the index human development and poverty. The problem can be formulated as

follows:

1. How does the BI rate, Money Supply and the rupiah against the US dollar, oil

prices and gold prices on inflation in Indonesia simultaneously?

2. How does the BI rate, Money Supply and the rupiah against the US dollar, oil

prices and gold prices to the inflation rate in Indonesia partially?

3. What is the effect of inflation on the human development index in Indonesia?

4. How is the effect of inflation on poverty in Indonesia?

2. Literature Review

2.1 Inflation

Inflation is used as one of barometer tool to measure the health rate of an economy.

Inflation that is too high will decrease the level of social welfare. Conversely, too

low inflation reflects the economy which does not run maximally which impact on

slowing economic growth, stagnant job creation, and increased poverty community.

Based on that, inflation is a macro-economic problem which is very important, in

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which the unstable inflation rate is also more difficult to plan for the business world,

and does not encourage people to save, and various other negative impacts that are

not conducive to the overall economy. According to Al Magrizi (Adiwarman 2001)

inflation consists of, first, inflation because of shortage of goods (natural inflation)

and second, inflation because of human error caused by corruption and poor

administration, the policy of excessive taxes which implicates burden of farmers and

number of excessive money. Hamilton (2001) said that inflation has been described

as an economic situation when the increase in the money supply is "faster" than the

new production of goods and services in the same economy.

The quantity theory of money describes the systematic analysis of the direct

relationship between growth in the money supply and inflation which is expressed in

the formula; MV = PT. Where M = the amount of money supply, V = rate of

turnover, T = volume of output, P = price level. Based on this theory, in the long-

term growth in the money supply does not affect real output growth, but it will push

up the price level proportionally.

Expert of monetary economy that embraces the quantity theory in its development,

better known by economists’ wing Monetarists. One of its leaders is Milton

Friedman which states that inflation is always and everywhere a monetary

phenomenon. Fisher and empirical studies prove that the growth of money supply

and high inflation rate has a high correlation. Inflation can be distinguished based on

the factors that cause it:

(a) Demand pull inflation

According to John Maynard Keynes (1883-1946) increase in aggregate demand as a

source of demand-pull inflation. Aggregate demand consists of consumption

expense, investment and the government. When aggregate demand is greater than

the aggregate supply at the level of full employment, inflation occurs and even

before the achievement of full employment rate of inflation may also occur.

(b) Inflation insistence on cost (Cost Push Inflation)

The price increase that occurred because of increased production costs, including

rising wage levels. Where the basic cause of Cost-push inflation is the rise in money

wages is more rapidly than the productivity of labor. Another factor that led to the

price increases were the companies want huge profits because of rising wages and

production costs. The increase in production costs encourages companies to raise

prices, despite having to take the risk of facing a reduction in the goods produced.

The method of calculating inflation could use several ways, among others, is the

Consumer price index (consumer price index): an index number that compares the

nominal GDP to real GDP for a given year, Whole sole price index (price index

wholesalers), Implicit gross domestic product and Produces deflator price index.

Factors that affect the inflation rate in this study were:

2.2 The rate of interest



The classic concept, represented by David Ricardo and Alfred Marshall, “interest as

determined by the rate of return that can be achieved by using capital or the price to

be paid for using capital, price set as balance between global demand for capital

and capital stock offered in the market”. Meanwhile, according to Marzuki (1997)

interest is the amount of money paid in exchange for the use of the borrowed money

and by Paul Samuelson and William D. Nordhaus (1993), interest is the price paid

for borrowing money for a certain period, usually expressed as a percentage of the

principal loan per year, while Frank J. Fabozzi (1999), interest is the price that must

be paid borrower / debtor to the borrower / creditor for the use of resources during a

certain period and Devereux and Yetman (2002), interest rate is described as the

price a borrower pays for the use of money he does not own and has to return to the

lender who receives for deferring his consumption, by lending to the borrower.

Interest can also be expressed as a percentage of money taken over the period of one

year.

2.3 Foreign Exchange

According to Frank J. Fabozzi and Franco Modigliani (Fei Ming, 2001) the

exchange rate is defined as the amount of one currency that can be exchange per unit

of another currency, or the price of one currency in terms of another currency,

Dominick (1995) explains that the foreign exchange rate is the price of a domestic

currency of foreign currency, Paul Krugman and Maurice Obsfeld (1996) stated that

the price of a currency against other currencies is called currency and Puspopranoto

(2004) the price at which the currency a country's currency is exchanged for another

country called the exchange rate and Timothy (1997) says "an exchange rate is an

expression of the value of one country's currency in terms of another country's

currency. It specifies how many units of one country's currency can be exchanged

for one unit of the other country's currency".

2.4 Free Money (Money Supply)

There are two different views in terms of printing money supply. First, money

supply is entirely determined by the Monetary Authority or the Central Bank. In

Indonesia, the amount indicated by the amount of base money. The amount of base

money was influenced by the policy of the Monetary Authority in determining

instruments of "Bank Indonesia Rate / BI Rate" which would be a signal of the

interest rate of Bank Indonesia Certificates (SBI) and the amount of reserve

requirement (the minimum reserve requirement; reserve requirement) set by Bank

Indonesia. Both the money supply is determined by other institutions such as

commercial banks and public behavior. In Indonesia, the money supply is affected

by the commercial banks which is shown by the amount of demand deposits and

quasi-money. Total demand deposits and quasi-money was influenced by the interest

rate. The behavior of the market interest rate is also influenced by the behavior of

people in the store or borrow money in the money market. According to Winardi

(1995) when the amount of money in circulation far, compared with the amount of

goods and services offered or when there is a loss of confidence in the national

currency, inflation may occur.

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2.5 World Oil Prices

Fluctuations in the price of crude oil in the international market, in principle,

following the axiom generally accepted in the market economy, where the level of

the prevailing price is determined by the mechanism of demand and supply (demand

and supply mechanism) as fundamentals and non-fundamentals, especially with

regard to infrastructure issues, geopolitics and speculation.

On the demand side, the behavior of oil prices is strongly influenced by the growth

of the world economy and on the fluctuation supply side in crude oil prices which is

strongly influenced by the availability or supply of oil by producer countries, both

countries are members of the Organization of the Petroleum Exporting Countries

(OPEC) as well as non-OPEC producing countries. According Kesicki (2010) and

Breitenfellner et al., (2009), the availability or supply of oil is closely associated

with the production capacity, investment capacity and refinery infrastructure while

according to Hamilton (2012), and the supply-demand conditions and the strike on

the oil trade have such great influence in the oil price fluctuations than the Middle

East political situation.

World crude oil prices measured by the spot price of world oil market, generally oil

prices used as the standard price of the world is the West Texas Intermediate (WTI).

West Texas Intermediate (WTI) which having a high quality of crude oil. And the

other factor is the OPEC oil price, Dubai Crude, and Tapis Crude (Singapore).

Besides that, the rise/drop in world oil prices could result in economic activities

such as: (1) increase in oil prices could cause a rise in the marginal cost of industrial

production so as to reduce production and increase unemployment (Lardic and

Mignon, 2006, 2008; and Dogrul and Soytas, 2010). (2) The increase in oil prices

led to rising inflation. The Crude oil prices which were higher will be immediately

followed by the rising prices of oil products, such as gasoline and fuel oil which

were used by the consumer (Cologni and Manera, 2008).

2.6 Price of Gold

Gold is one of the natural resources that can not be updated and the volume of gold

in the world is limited. In addition, gold is not unduly influenced by political

developments or security of a country. Besides, gold is believed to be one of the

commodities that may be useful as an investment, as prices continue to rise so as to

bring the benefits of the difference between the purchase price and selling price.

According Sunariyah (2007) one of the forms of investment which tend to be free of

risk is gold. Gold is considered better to hedge against inflation. However, according

to Anggarwal (2010) reality may differ due to, gold may in the long term can be a

hedge against inflation, but in the short term price volatility may occur.

3. Human Development Index (HDI)



The Human Development Index is a benchmark in the achievement of human

development of good quality in terms of its impact on human physical condition

(health and welfare) as well as non-physical (education). UNDP defines human

development as a process of expanding the options for the population in terms of

income, health, education, physical environment, and so on. According to BPS, the

three basic dimensions as a reference to measure the Human Development Index

which includes longevity and a healthy life (a long and healthy life), knowledge, and

standard of living (desent standard of living). Elizabeth A. Stanton (2007) said that

HDI is a measure of human development that combines human proxies for three

important capabilities: health, education, and a decent standard of living. Health (H)

is represented by life expectancy (LE), education by literacy (LIT) and school

enrollment (ENR), the literacy and school enrollment indices are combined in a

weighted average as the education (E) index, and standard of living by GDP per

capita (Y).

According to Makiko Ito Harrison measure three dimensions are the basic concept of

human development. They are (1) for people to live a long and healthy life, (2) for

people to acquire knowledge and (3) for people to have access to resources needed

for a decent standard of living. So that HDI of a country is thus the unweighted

average of the life expectancy index component, the educational attainment

component index and the adjusted real GDP per capita (PPP $) index component.

UNDP differentiate HDI level based on three classifications namely: Low (HDI less

than 50), the lower-medium (HDI between 50 and 65.99), upper-medium (HDI

between 66 and 79.99) and high (HDI 80 upwards). Regional HDI of Indonesia

including lower-middle class (lower-medium) to medium-top (upper-medium). High

levels of human development will determine the population's ability to absorb and

manage the sources of economic growth, good connection with or against

institutional technology as an important tool to achieve economic growth (Ramirez,

1998).

4. Poverty

Poverty according to the Central Bureau of Statistics (2000) is a condition where an

individual or group of people unable to meet their basic needs, such as food,

clothing, shelter, education, and health is regarded as a minimum requirement, and

have a certain standard. According to the World Bank poverty is a situation where an

individual or group has no option or opportunity to improve his/their standard of

living in order to live in a healthy life and better according to the standard of living,

dignity and appreciated by others. According to Rank (2004) the causes of poverty

can be grouped in three main factors: individual factors, cultural and environmental

factors, and structural factors. The individual poverty is an individual failure due to

lack of motivation. According to the Rank (2004), human capital can have a big

effect on individual poverty or success. And the literature shows that human capital

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significantly affects public revenues, and due to the lack of human capital can put an

individual at risk for poverty.

Meanwhile Djojohadikusumo (1995) states that the poverty pattern is divided into:

(1) Persistent poverty, the poverty that has chronic or from generation to generation;

(2) Cyclical poverty, the poverty that followed the pattern of the overall economic

cycle; (3) Seasonal poverty as was the case with the fishermen and farmers of food

crops; (4) Accidental poverty, is poverty because of natural disasters or the impact of

a particular policy which led to reduced levels of welfare of the population.

The cause of poverty is seen from an economic standpoint according to Sharp

Mudrajad, 1997 as follows:

(1) Poverty arises because of the inequality of resource ownership patterns which

lead to an unequal distribution of income;

(2) Poverty arises from the difference in the quality of human resources;

(3) Poverty arises from the difference in the access to capital.

Based on the results of Easterly and Fischer (2001) the relationship between

inflation and household poverty by using the data of 38 countries is that inflation

makes the poor worse off and that the poor suffer more from inflation than the rich,

while the results of the research by Min Bahadur Shrestha and Shashi Kant

Chaudhary (2012) showed that a 10 percent rise in food prices is likely to increase

overall poverty in Nepal by 4 percentage points. It implies that a one percent rise in

food inflation will push 100 thousand additional people into poverty overall and 180

thousand additional people into food poverty.

From the description above it can be concluded that poverty causes inconvenience in

life, endangerment enforcement of rights and justice, endangerment of bargaining

position of a country in the world association, as well as the bleak future of the

nation and the state. Based on the formulation of the problem contained in section 1

above, it can be hypothesized as follows:

1. It would be unlikely that the BI rate, Money Supply and the rupiah against the US

dollar, oil prices and gold prices affect the inflation in Indonesia simultaneously?

2. It would be unlikely that the BI rate, Money Supply and the rupiah against the US

dollar, oil prices and gold prices affect the inflation rate in Indonesia partially?

3. It would be unlikely that the inflation effect on the human development index in

Indonesia?

4. It would be unlikely that the inflation effect on poverty in Indonesia?

5. Research Methodology

The scope of research concerning the inflation rate, the BI rate, Money Supply and

the rupiah, world oil prices, the price of gold, HDI and poverty and the data recorded

in the Central Bureau of Statistics (BPS) at the national level and Bank Indonesia.



The model used in this research is multiple linear regression model. The goal is to

see the effect or the relationship between the dependent variable and independent

variables. Regarding this study, the dependent variable is inflation, HDI and Poverty

and the independent or explanatory variables are the BI rate, Money Supply and the

rupiah, world oil prices, gold price. To analyze the data used Windows-based

computer program that is widely used for statistical and econometric analysis of

time-series types (E-views). The model specified is therefore:

1. Y = a + b1X1 + b2X2 + b3X3 + b4X4 +b5X5 +e

2. Y1 = a + b6Y +e

3.Y2 = a + b7Y+e

where:

X1 = BI rate

X2 = Supply Money

X3 = Foreign Exchange Rates

X4 = Oil Prices world

X5 = gold Prices

Y = Inflation

Y1 = HDI

Y2 = Poverty

According to the Gauss-Markov theorem, a good linear estimator has blue (best

linier unbiassed estimator) properties. This property requires the following criteria:

(1). The ß1 estimate is linear to the dependent variable;

(2). The ß1 estimate is unbiased, meaning the expected average value or value of β1

or E (β1) equals the true ß1 value;

(3). Estimator ß1 has a minimum variance that is efficient.The accuracy of the

sample regression function in estimating the actual value can be measured from

goodness of its fit. Statistically:

(a) Individual Parameter Significance Test (t - test). This test is to know the

influence of each independent variable individually to the dependent variable.

(b) Simultaneous Significant Test (F-test). This test is to determine whether the

independent variables together affect the dependent variable. Where the value of

F can be calculated as follows (Gujarati, 1997).

R² / ( k – 1 )

F hit = ----------------------------------

( 1 - R² ) / ( N – k )

If F hit> F tab with a certain level of significance (eg 5%) then Ho is rejected

and Ha accepted. If Fhit <Ftab with a certain level of significance (eg 5%) then

Ho accepted and Ha rejected.

(c) Testing Good ness of Fit (Test of R²)

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To know the level of better accuracy in regression analysis. Coefficient of

determination (R²) can be statistically measure. The level of regression accuracy

is indicated by the magnitude of the coefficient of determination (R ²) whose

magnitude is zero and one (0 <R² <1). The value of R² close to 1 illustrates that

the existing model has a high enough forecasting power, otherwise if the value is

close to zero means that the model has no power in predicting (Gujarati, 1995).

The classical assumption is that the relationship between the independent variable

and the dependent variable is linear. The linear equation is said to be good if it meets

the BLUE (Best Liniear un biased Estimation) assumption, the four assumptions that

must be met are as follows:

(1) Residual Ui is a random variable that is normally distributed with zero average

that is E (Ui) = 0.

(2) Conditional variants of constant residual or homoscedicity.

(3) There is no autocorrelation between residuals.

(4) There is no multicolonierity between.explanatory variables

6. Result and Discussions

The regional economy does not escape from the economic diseases of inflation that

always appear in the economy. Inflation as an economic turmoil should not be

abolished at all but controlled at a certain rate so as to promote economic growth.

This study was conducted to determine the factors that influence inflation and how

the effect of inflation on Human Development Index and poverty. In determining the

factors influencing inflation, they are based on the theory of demand pull inflation

and supply side inflation.

According to the demand pull inflation theory, inflation is due to an increase in

aggregate demand (the economy in a state of full employment), resulting in excess

demand and causing the price of goods to rise, the factors cause increased demand.

While the inflation from the aggregate supply side is due to the rising production

cost, to overcome this, the entrepreneur raises the selling price which is charged to

society so that the price of goods and services increases.

In addition, the increase in the prices of these goods will affect the community's

ability to access development in the fields of education, health and economy and the

rising prices of these goods has also led to an increase in the number of poor people.

Testing Against Violations Classical assumptions made include; Autocorrelation,

multicollinearity, heterocedasticity (Gujarati, 1995). From the test can be known

whether the model used is relevant or not. The test of deviations of these classical

assumptions can be explained as follows:



Model 1:

Based on the results of multicollinearity testing, the relationship between variables

(BI rate, exchange rate, money supply, world oil price and gold price), determination

coefficient value (R²) is spanned 0.056867 to 0.747656. This shows that the test

value is smaller than 0.8, meaning the relationship between variables does not

contain multicollinearity. And for heterokedastisity test, the test result is Obs * R-

square value of 6.996941 and prob .Chi-Square is 0,2209> α = 0,05, hence no

heteroskedasity symptoms. As for the autocorrelation test, Obs * R-square value of

1.9637 and Prob. Chi-Square (2) of 0.3746> α = 0.05 to obtain the result that

autocorrelation symptoms do not exist. Besides the normality test, obtained Jarque-

Bera value of 0.5458 and the probability of 0.7612, based on these values it can be

concluded that the data is normally distributed.

The statistical t test basically shows how far the influence of one independent

variable individually in explaining the variation of the independent variable to the

dependent variable. The results of the test can be seen as follows:

Table 1. Results of Multiple Regression Dependent Variable: INFLASI

Method: Least Squares

Date: 04/03/17 Time: 12:19

Sample: 1997 2016

Included observations: 20

Variablel Coefficient Std. Error t-Statistic Prob.

C 26.86178 10.23589 2.808216 0.0325

BIRATE 1.445575 0.317153 4.557973 0.0004

Ln KURS 0.147439 2.255760 0.065361 0.9488

Ln JUB -18.47942 6.549767 -2.821386 0.0136

Ln OIL 2.262646 1.016784 2.225296 0.0430

Ln GOLD 20.53676 4.912078 4.180871 0.0009

R-squared 0.962964 Mean dependent var 10.90800

Adjusted R-squared 0.949737 S.D. dependent var 16.15486

S.E. of regression 3.621822 Akaike info criterion 5.655156

Sum squared resid 183.6463 Schwarz criterion 5.953876

Log likelihood -50.55156 Hannan-Quinn criter. 5.713470

F-statistic 72.80245 Durbin-Watson stat 1.662551

Prob(F-statistic) 0.000000

From the result of t test can be done discussion of hypothesis proposed as follows:

1) Influence of BI Rate variable to Inflation, indicating that partially BI rate has a

significant level of 0.0004 and t-count value of 4,5579, where the variable BI rate

has significant effect to inflation. While the results of Cavoli's research, Tony and

Rajan, Ramkishen S (2007) found a strong association related to interest rate on

Y. Yolanda

51

inflation and output in the case of Korea and Thailand compared to the case of

Indonesia and Philippines. On the other hand, exchange rate does not reflect the

monetary policy response, both in terms of inflation and output (because of the

parity conditions associated with exchange rate).

2) Influence of Exchange Variable to Inflation, indicating that partially Exchange

rate has a significant level of 0.9488 and t-count value of -0.06536, where the

variable Exchange rate has no significant effect on Inflation. The results of this study

are in line with Kamas (in Madesha et al., 2013), study on Colombia observed that

the exchange rates did not play an important role in explaining the variation in

inflation in Colombia and that inflation appeared to be primarily inertial with respect

to the exchange rate but Largely determined by demand shocks. And contrary to the

results of Zahoor Hussain Javed et al's (2010) research, the sign of the variable

exchange rate shows that there is a positive relationship between exchange rate and

inflation measured by CPl. And the positive relationship is that as the exchange rate

increases (devaluation or depreciation of Pakistani rupee) the inflation increases

because the imports become the expensive ones in turn up the domestic costs of

production and inflation.

3) Influence of Variable Amount of Money Supply (JUB) to Inflation, show that

partially JUB has significant level equal to 0,0136 and t-count value equal to 2,8214

which mean JUB variable have significant effect to Inflation. (1) Dragos et al

(2013), where the money supply and intrest rate has a significant and strong

relationship for the country of the period 1987-2011, (2) Olorunfemi Sola and

Adeleke Peter (2013), where there is a positive relationship between money supply

and inflation in Nigeria from 1970-2008 and (3) Keshab Bhattarai, where the money

supply growth has a positive and significant effect on inflation in the UK.

4) The Influence of World Oil Price Variable on Inflation shows that partially world

oil price has a significant level of 0.0430 and t-hit value of 2.2252, which means that

the world oil price variable has a significant effect on Inflation. The same thing from

the Cologini and Manera (2008) study found that for all countries except Japan and

the UK, changes in oil prices did affect the rate of inflation. Meanwhile Chou &

Tseng (2011) examined the long run and short run effects of oil prices on inflation.

The research is conducted for one country (Taiwan). The result clarifies that the oil

prices in the global market has a significant and positive effect on inflation in the

short run it is proved that the effect is not significant.

5) The Influence of Variable of Gold Price to Inflation shows that partially gold

price has a significant level of 0.0009 and t-count value of 4,1809 which means that

gold price variable has significant effect to Inflation, in line with Mishkin's opinion

(2010) demonstrates that there is a positive relationship between gold prices and the

increase in unexpected inflation since the gold and gold appreciation will support

gold demand which boosts gold prices.

The result of F-statistic test shows that the value of F arithmetic is 72,8025 with

probability (sig-F) equal to 0,0000, this means that the variable of BI rate, Exchange

Rate, Total Money Supply (M1), world oil price and gold price has significant effect

Simultaneously to Inflation And the coefficient of determination equal to 94,97%,

which mean 94,97% change from inflation caused by variation of change of variable



of BI rate, Exchange rate,World Oil Price and Gold Price. Considering the above

result, we get the following regression equation:

Y = 26,8618 +1,4456 BI rate + 0.1474 LnKurs - 18,4794 Ln JUB + 2,2627 World

Oil Price + 20,5368 Ln Gold Price + e

Based on the results of multiple regression above they can be interpreted that:

1) Influence of BI Rate Variables, Exchange Rate, World Oil Price and Gold Price to

Inflation is positive, in this case means the ups and downs of BI rate variable,

Exchange rate, World oil Price and Gold Price resulted in rising / falling inflation

value.

2) The effect of JUB variable on inflation is negative, this means that the increase of

the Money Supply will result in the decrease of inflation value. The results of this

study contradict the results of Ali Yousfat's (2015) research; the study used annual

time series data from 1970 to 2013, Johansen cointegration approach identify long

run relationship. The empirical results confirm that in the long run money supply

growth has significant and positive relationship with inflation. But based on the

theory, if that causes inflation from the supply (increase the price of goods due to

lack of liquidity), then the relationship is negative.

Model 2:

Based on the results of heterokedastisitas test, Obs * R-square value of 0.2365 and

prob .Chi-Square is 0,6267> α = 0,05, hence no heteroscedidity symptoms. As for

the autocorrelation test, Obs * R-square value of 2.1423 and Prob. Chi-Square (2) of

0.3426> α = 0.05 to obtain the result that autocorrelation symptoms are not a

problem. Besides the normality test, obtained Jarque-Bera value of 1.3783 and the

probability of 0.5020, based on these values it can be concluded that the data is

normally distributed.

The statistical t test basically shows how far the influence of one independent

variable individually in explaining the variation of the independent variable to the

dependent variable. The results of the test can be seen as follows:

Table 2. Results of Multiple Regression Dependent Variable: IPM/HDI


Date: 04/04/17 Time: 10:48

Sample: 1997 2016


Variable Coefficient Std. Error t-Statistic Prob.

C 4.450380 0.394091 11.29276 0.0000

INFLASI 0.046868 0.020574 2.278025 0.0352

Y. Yolanda

53



S.E. of regression 1.448752 Akaike info criterion 3.673922

Sum squared resid 37.77989 Schwarz criterion 3.773495

Log likelihood -34.73922 Hannan-Quinn criter. 3.693360



Based on the above table, shows that inflation has a significant and positive effect on

the HDI. This shows that the rise / fall of inflation will result in the rise / fall of HDI.

The results of this study explain that inflation is caused by high purchasing power

(demand push inflation). Besides, the influence of Inflation variable to HDI is

22.38%, while 77.62% is influenced by other variables.

Model 3:

Based on the results of heterokedastisitas test, Obs * R-square value of 0.3833 and

prob.Chi-Square of 00,5359> α = 0,05, then the heteroskedasitas symptom does not

exist. As for the autocorrelation test, Obs * R-square value of 6.8233 and Prob. Chi-

Square (2) of 0.0330> α = 0.05 so the result obtained that the autocorrelation is

problematic. Besides the normality test, obtained that Jarque-Bera value of 5.2749

and probability of 0.0715, based on the value it can be concluded that the data is

normally distributed. The statistical t test basically shows how far the influence of

one independent variable individually in explaining the variation of the independent

variable to the dependent variable. The results of the test can be seen as follows:

Table 3. Results of Multiple Regression Dependent Variable: Ln POOR


Date: 03/25/17 Time: 22:34

Sample: 1997 2016


Variable Coefficient Std. Error t-Statistic Prob.

C 3.484811 0.040295 86.48151 0.0000

INFLASI 0.005374 0.002104 2.554604 0.0199



S.E. of regression 0.148134 Akaike info criterion -0.886766

Sum squared resid 0.394984 Schwarz criterion -0.787193

Log likelihood 10.86766 Hannan-Quinn criter. -0.867328





Based on the above table, shows that inflation has a significant and positive effect on

Poverty. This shows that the rise / fall of inflation will result in the rise / fall of

Poverty. The results of this study are similar to the results of other studies such as:

(1) Hazoor Muhammad Sabir and Safdar Hussain Tahir, the co-efficient of

inflationary poverty and inflation. (2) Chani et al. (Arab Naz1 et al., 2011) examined

the relationship between economic growth, inflation and poverty for the Pakistani

state with the ARDL testing approach of the period 1972-2008. The results show

that inflation has a positive effect on poverty. Short-term inflation has a positive

impact on poverty. (3) Farhad, K.K and Nabi S.T. (2014) suggests that inflation has

a positive effect on poverty in Iran. Besides, the influence of inflation variable to

poverty is 26.60%, while 73.40% is influenced by other variables.

In model 3 above, it shows that autocorrelation is problematic, which means that

model is not good in estimation. Therefore, error corection model is done (ECM).

Based on the unit root results for inflation and poverty ie stationary at the level of 1st

Difference, this means that Inflation to Poverty is integrated. To ensure long-term

and short-term relationship between inflation with poverty, it is done cointegration

test by Johansen method. The long-term relationship between inflation and poverty

is Trace Statistic (35.87723)> Critical Value (15.49471) and Probability 0,0000

<0.05, as well as Max Eigen Statistic (34.38414)> Critical Value (14.26460) and

Probability 0.001 <0.05, this means long-term cointegrated poverty inflation and

long-term estimates have a significant and positive effect. While the results of short-

term relationships show that inflation has no significant effect on poverty. Based on

the results of the above research, for the long term, the results are not different when

the autocorrelation is problematic.

7. Conclusion

This paper discusses 3 regression models, where model 1 is the relationship between

BI Rate, Money Supply, World oil price and gold price with inflation, on the other

hand inflationary relationship with HDI and Poverty in Indonesia. The findings

reveal that the variable BI rate, Exchange rate, World oil Price and Gold Price to

Inflation are positive and significant. While JUB variable to inflation is significant

and negative. Model 2 refers that inflation has a significant and positive effect on

HDI and model 3 refers that inflation has a significant and positive effect on

poverty for the long term. These findings indicate that inflation is a disease in the

economy of a country that brings the impact of all economic activities. Another

number of research results stated that the variables studied significantly influence the

rate of inflation meaning that these studies can be used by the government in

determining fiscal and monetary policy.

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Analysis of Factors Affecting Inflation and its Impact on